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Companies Need To Prepare For SEC Nod On International Accounting

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A leading accountant offered ways that companies should begin to prepare for international accounting changes that are expected to become requirements when the U.S. Securities and Exchange Commission announces guidelines and deadlines for those guidelines later this summer.

The ‘SEC Roadmap’ is expected to include a date by which U.S. companies will be required to move to International Financial Reporting Standards, said Lisa Filomia-Atkas, a partner, financial services with Ernst & Young, New York. The date is anticipated to be around 2013 with public companies in the U.S. given the option to implement as early as 2011, she added during a presentation here.

Since 2 years of balance sheets may be required for comparison purposes, companies may need to begin submitting IFRS-compliant financials starting in 2010, she explained. However, according to Filomia-Atkas, when foreign filers were required to file with the SEC, that Washington-based regulatory body only required one year of comparative information, so there might be some leniency.

Even as the industry awaits direction from the SEC, questions remain such as whether non-public companies will be impacted,and if they are, whether public companies will be required to comply with new international accounting standards first, followed by non-public entities.

Additionally, once companies are complying with standards governed by the International Accounting Standards Board, London, and when U.S. GAAP accounting goes away, Filomia-Atkas asked, will the Financial Accounting Standards Board, Norwalk, Conn., also go away, or will it become part of another global entity governing accounting?

Filomia-Atkas said she is aware of companies that are starting an impact assessment and maintained that many companies will begin approaching their boards this fall both to inform them of the need to take action and establish governance structures, as well as obtain funding to begin to create the accounting systems that will be necessary to prepare for the new accounting standards that may be implemented.

There are steps that companies should begin to undertake, Filomia-Atkas said. These include doing a cost benefit analysis of a new system. The cost of preparing accounting systems could be greater than the cost companies recently experienced for complying with the Sarbanes-Oxley Act, she noted.

And, because of SOX, she added, the change in processes will need to be done in “a well controlled manner.”

Among points that companies will need to look at, Filomia-Atkas said, are changes to accounting systems and disclosure, new accounting policies and tax and regulatory decisions.

Companies will need to decide whether to use spreadsheets or to imbed changes to reflect IFRS in the technology used in accounting systems, she added.

And, the impact of these changes will go beyond accounting and affect all parts of a company’s business. For instance, if a firm has debt covenants in place, it might be necessary to get waivers on some of the provisions of those covenants if earnings are more volatile or there are accounting changes to debt and off-balance sheet items, she explained.

Items such as taxable income could also change, she noted. For instance, if there is a major impact on taxable income, the Internal Revenue Service may be required to consent to some of the accounting treatments that a company chooses. And, it could affect tax areas such as tax repatriation and interest deductibility.

Filomia-Atkas’s remarks parallel comments made by Douglas Barnert, executive director of the Group of North American Insurance Enterprises, New York, when he explained to state insurance legislators that since March of this year, the idea of “convergence” of U.S. and international accounting standards is now being discussed as “replacement” and the concept of “if” these changes are made has been replaced with the notion of “when.”

During his presentation last month at the summer meeting of the National Conference of Insurance Legislators, Troy, N.Y., Barnert detailed how there is still much work that needs to be done to improve proposed international accounting standards and cautioned that “what happens for general purpose accounting will drive insurance regulatory accounting.”

Barnert also noted that state legislators may need to pass legislation regarding insurance regulatory accounting and solvency requirements.

As IFRS becomes the global accounting standard, Barnert said insurance issues that still need to be worked out include:

–The current exit value method of valuing liabilities which is based on “hypothetical ‘transfers’ of obligations to policyholders.”

–The further testing that such a new method requires.

–A decision that profits should be recognized as the insurer is released from risk and not on “day one” of a contract.

–In a similar fashion, that risk margins should be released as the insurer is released from risk.